Despite the fact that most people find trading on the stock exchange very confusing and incomprehensible, almost anyone can start investing in securities. Only a little patience and attention is needed, since thoughtless actions in 99% will only lead to losses. To avoid them, we suggest that you look through our material, where we will tell you how to start investing in securities. Without going into details, the investment in securities is based on the principle of mutual benefit. When a company needs additional finance for its development, it issues stocks and makes them available for public sale. A buyer, in turn, can buy them, thus transferring his funds to the company and receives the right to a part of its profits.
An alternative option is the purchase of another type of securities - bonds. They differ from shares, as payment on them is guaranteed by law and is of higher priority in case of bankruptcy of an enterprise. At the same time, it is impossible to get money for them at any time you like, since the repayment period is fixed. The second disadvantage for the investor is lower yield.
In general, both types of investments have their pros and cons, and every customer can choose what is more appropriate for him: potentially higher and faster returns of stocks or a lower risk level of bonds. Since most novice traders find it much more interesting to make quick profits, we’ll continue to focus more on stocks.
How to Earn on Stocks?
There are only two ways to earn on stocks:
- Dividends. In this case, the investor's profit depends on the company's net profit and the number of stocks purchased. Dividends are paid based on the results of a year, nine, six or three months. The resulting profit can be refinanced. To do this, a trader should continue to invest in dividend stocks, which increases each subsequent payment from the company. Many novice investors do not want to wait for income for so long, so they prefer the second way of earning. However, there are many successful cases of investing in dividend stocks.
- The exchange difference (also speculative gain) is based on the timely purchase and sale of stocks. The basic principle is simple: buy cheap, sell high. However, to catch that “perfect” moment, you need not only to choose the right company, but also to constantly monitor the market situation. This method of investment is potentially more profitable, because it can bring impressive profits in the short term, but the risk is also higher in this case.
Which Stocks to Buy?
This question requires a complex approach, implying division of all the stocks into three groups.
Stocks can be cheap and expensive. It is difficult to say which are the best to invest in. It all depends not only on the amount of money you want to spend, but also on the market situation. Practice shows that profit is possible in either case. For example, you can buy cheap stocks of a young company that suddenly succeed, or invest in expensive securities of market giants, which pay dividends not very quickly, but on a regular basis.
Stocks can be:
- Dividend. Stock value is not very significant here, since such stocks are acquired only for the sake of stable dividends.
- Growth stocks. The companies that own these stocks demonstrate stellar growth but don’t pay dividends, investing all their income in development. This is a classic example of earning on the timely purchase and sale with the income from the difference in prices.
- Value stocks are potentially expensive stocks in which the market is not interested for some reason. It is highly probable that their prices will soar, but it is impossible to determine when this will happen.
Companies all over the world issue stocks, and you can invest in almost any of them. Statistics shows that stocks of domestic companies are significantly cheaper (Gazprom’s stock price was only RUB 163.00, Sberbank – RUB 235.00 as of the day this article was written). Dynamics of the Russian companies is a little bit different, as they grow faster than foreign ones when the market goes up, and they depreciate more when the market is in decline (during downturn).
Stocks of foreign, and especially US, companies are the most popular among investors, since they are more stable, and all profits are immediately calculated in currency and little depends on fluctuations in the ruble exchange rate. However, the value of stocks of major US firms is significantly higher (for example, Microsoft - $123.00, Coca-Cola - $47.00).
How to Buy and Sell Stocks
The most convenient way to enter the stock exchange is trading with a broker, an intermediary company that ensures opening of a special brokerage account and the execution of your orders. An individual cannot start trading on the stock exchange without intermediaries.
We recommend you to read our previous article, where you can find detailed information about the process of sale and purchase, as well as the brokerage services.
How to Guarantee Successful Investment in Securities?
Unfortunately, no one can give you a 100% guarantee that the invested funds would be safe, that’s why experienced investors always warn: you should not try to make money on the stock exchange, investing the last money in stocks and waiting for the earliest profit growth. Such approach is likely to give the complete opposite effect. But in order to minimize risks, we offer you a rough action plan that will help you make your first profitable investment in securities.
- Prepare to work with the exchange. Read books or at least watch video tutorials from successful investors. The first purchases and investments can be made virtually without investing real funds, as you can open a special demo account with a broker.
- Determine your budget. Experienced traders recommend starting at $200-500. This amount may be less, if you invest in Russian companies.
- Analyze the market, choose the companies, stocks of which are worth investing in.
- Distribute funds. Experienced players never spend all the money on one company. It is better to distribute the budget to 5-10 directions, among which there will be both dividend and value stocks. This will help you to avoid unsuccessful investments.
- Choose a broker, open an account and top it up.
- Buy stocks.
- Follow the news and prices. You can do this online or in the trading terminal, which a broker will offer you.
- Reinvest. Spend some part of your profits to expand packages of acquired securities or in new investments.
Using this plan, you can become a successful investor, who will earn much in a few years.
Written by Forex Ratings Senior Market Analyst Feng Zhou